POVERTY ALLEVIATION: MAKE IT A BUSINESS, NOT CHARITY

MAHVISH JADOON
Aug 20 - 26, 2007

Thirty years ago the "microfinance movement" was launched in 1976 by Professor Muhammad Yunus in Bangladesh. Since then it has grown by leaps and bounds, and has touched lives around the world. Professor Yunus founded Grameen Bank in Bangladesh in 1983 and it now has 7.21 million borrowers and 2,431 branches. In 1997 Professor Yunus launched Grameen Foundation with the aim of delivering the advantages of microfinance around the world. It has helped establish a network of 52 local microfinance institutions (MFIs) in 22 countries, affecting an estimated 11 million lives in Asia, Africa, the Americas, and the Middle East.

Grameen Bank is a commercial bank; it has reported profits every year except in 1983, 1991, and 1992. In 1995 it stopped taking any more donor money and all of its loans are financed from its own deposits. Grameen Bank has become a trustworthy name not only in Bangladesh but in countries everywhere because it proves in action what many had deemed Utopian in theory. GB has shown that it is possible to give opportunities to poor people without debasing them and in the process make profits. But the bank is foremost focused on the people that it serves; its interest rates reflect this and the many different products that it offers. It has a 0% interest rate for "struggling members" or beggars, 5% for student loans, 8% for housing loans, and 20% for income generating loans on a declining basis which makes it equivalent to a 10% flat rate. GB offers loans without requesting any collateral and signing a legal document which might make prosecutions possible against defaulters. It is necessary for an individual to belong to a 5 member group, but the group members are not responsible to pay for the individual in case of default.

Pakistan with more than 25 to 30 million poor people offers a huge market for microfinance. There have been efforts over the years through a collection of MFIs, microfinance banks, rural support programs, and NGOs to provide microfinance services to these people but so far the outreach has been less than 4%. Most of these providers have not achieved sustainability including the state owned Khushhali Bank. The availability of deposit services at these MFIs is important to increase sustainability as it provides a steady stream of funds as in Grameen Bank. Kashf Foundation in Lahore is the only MFI that has reported positive returns and opening of savings accounts is one of the products that it offers. Pakistani MFIs, as compared to Indian and Bangladeshi MFIs, have the worst sustainability indicators on average with negative average rate of return on assets. Indicators of efficiency and labour productivity are also the worst compared to the other two countries. This may be due to the higher operating expenses and cost per borrower in Pakistan. MFIs in Pakistan also have less experience which is directly related to sustainability.

Due to the high operating expenses of MFIs in Pakistan and the dire need of microfinance solutions to reach people fast, projects such as mobile phone banking should be given more attention. "Branchless banking" is gaining importance in many countries and helps reduce transaction costs by enabling payment of loans, receiving international remittances and many other transactions through mobile phones. Pakistan was chosen as a pilot for a series of diagnostics in seven countries and CGAP (Consultative Group to Assist the Poor) conducted a mission in January to analyze the regulatory barriers that may exist.

MICROFINANCE LOOKED UPON AS A SOCIAL SERVICE

In Pakistan there is a lack of commercial banks in the microfinance sector and microfinance is still looked upon as a social service rather than a financial one. The failure to realize microfinance can be as a business venture is an enormous reason why it is not gaining the sustainability and growth that it should. If commercial banks with their extensive network of more than 3000 branches across the country were effectively utilized, the outreach of microfinance would be phenomenal. The State Bank of Pakistan has made available guidelines to facilitate the entry of commercial banks into this sector with options such as forming micro finance counters in existing branches, forming standalone microfinance branches, and mobile banking where services will be offered directly to the people as most MFIs do.

Microfinance through commercial banks might be the only long term viable option as it may be noted that Grameen Bank itself is a commercial bank. Professor Yunus is himself against state owned enterprises, he says: "I do believe in the power of the global free-market economy and in using capitalist tools... I also believe that providing unemployment benefits is not the best way to address poverty."

PERFORMANCE INDICATORS OF MFIS IN SOUTH ASIA

VARIABLES

MEAN

INDIA

PAKISTAN

BANGLADESH

Age

16.247

11.040

10.133

21.178

Number of Active Borrowers

156248

27097

30088

270052

Return on Assets (%)

0.002

-0.022

-0.068

0.035

Operational Self-Sufficiency (%)

1.087

0.943

0.796

1.265

Profit Margin (%)

-0.100

-0.112

-0.837

0.151

Operating Expense Ratio (%)

0.123

0.122

0.140

0.118

Cost per Borrower (US $)

17.721

16.092

44.773

9.609

Source: Efficiency and sustainability of micro finance institutions in South Asia- Pakistan Institute of Development Economics (and ongoing study approved by South Asia Network of Economic Research Institutes www.saneinetwork.net